This document summarizes a study that examined the effects of internal factors and stock ownership structure on dividend policy and company value for manufacturing companies listed on the Indonesia Stock Exchange between 2005-2010. The study found that: (1) free cash flow, company size, and return on equity influence dividend policy and company value in different ways; (2) debt, asset growth, and financial risk affect both dividend policy and company value; (3) managerial ownership does not affect dividend policy but does affect company value, while institutional ownership positively influences both; and (4) dividend policy positively impacts company value. The study used factors like cash flow, size, debt, growth, and ownership structure to analyze their relationship with dividend policy and company

1. International Journal of Business and Management Invention
ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X
www.ijbmi.org Volume 2 Issue 11ǁ November. 2013ǁ PP.06-18
The Effects of Internal factors and Stock Ownership Structure on
Dividend Policy on Company’s Value
[A Study on Manufacturing Companies Listed on the Indonesia
Stock Exchange (IDX)]
Nendi Juhandi1, Made Sudarma2, Siti Aisjah3, Rofiaty4
1
2.3.4
STIE Kusuma Negara Jakarta,
Faculty of Economics and Business Brawijaya University Malang, East Java Indonesia
ABSTRACT: This study intends to examine and analyze the effects of internal factors and stock ownership
structure on dividend policy and their impacts on company’s value and examine the influence of dividend policy
on company’s value. Internal factors cover free cash flow, company size, debt, asset growth, return on equity
and financial risk while stock ownership structure cover managerial and institutional stock ownership.The study
involved all of the manufacturing companies listed on the Indonesia Stock Exchange (IDX). There are 164
companies, 55 of which were selected using saturation sampling. The sampling was conducted during the sixyear observation periods from 2005 to 2010 totaling 330 observations (6 x 55). The data were analyzed by
applying Smart PLS (Partial Least Square). The results showed that: (1) free cash flow and company size have
no effect on dividend policy but on company’s value, meaning that free cash flow and company size do not
determine dividend policy but company’s value; (2) Return on Equity has no effect on company’s value but on
dividend policy, meaning that profitability determines dividend payment; (3) Debt, asset growth and financial
risk affect dividend policy and company’s value; (4) Managerial ownership has no effect on dividend policy but
on company’s value, while institutional ownership positively and significantly affects dividend payment and
company’s value. This indicates that corporate management is a representation of company’s ownership as a
company’s control. (5) Dividend policy positively affects company’s value significantly. This result confirmed
previous finding concluding that dividend payment has impact on company’s value.
KEYWORDS: Internal factors, dividend policy, stock ownership structure, company’s value.
I.
INTRODUCTION
Every company aims to maximize the wealth of its shareholders by maximizing the company‟s value.
The company‟s value, is reflected from the market value of company‟s shares. This aim does not only benefit
stockholders, but also the people in the company‟s environment. From the financial management perspective, it
is the more appropriate goal a company should aim for (Keown et al., 1999:2). The number of shares owned is
the ownership evidence of the company and shareholder‟s value is reflected from the market value of
company‟s shares.
A company‟s goal can certainly be reached by implementing financial management functions that
include fund-seeking and fund-spending function. Meanwhile, there are three financial decisions a financial
manager must take: Investment, financing, and dividend. The improvement of company‟s value highly depends
on how optimal these decisions are applied (Bishop et al., 2004: 8). These decisions are certainly intertwined,
according to Fama and French (2001). Optimum company‟s value can be reached through the implementation of
financial management functions. This is because one financial decision will affect other financial decisions and
therefore will influence company‟s value.
Investment decision defines the asset state when investing. Financing decision relates to the source of
finance for investing, and dividend decision includes distributing profits as company‟s dividend and retained
earnings. According to Hussainey et al., (2010), dividend policy is a policy when a company distributes profits
as dividend to shareholders and retains some of them to re-invest in the business. Dividend policy has been
empirically studied by financial experts with various findings which is why in financial management, it is still
debatable as to whether dividend policy influences company‟s value. The answer has yet to be resolved and
remains a puzzle (Black 1976, Al-Malkawi 2007, Khan et al., 2011).
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2. The Effects of Internal Factors and Stock…
II.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Dividend Policy
Dividend is a part of net profits distributed to stockholders in proportion to their ownership of company
shares. According to Hussainey et al., (2010), dividend policy is distribution of profits to shareholders as
dividend and to the business as re-investment.
There are several opinions about dividend payment. Al-Malkawi et al., (2010) summarized dividend
payment as follows: a) increases in dividend payment improve company‟s value, b) high dividend payment has
opposite effect on company‟s value, i.e it degrades company‟s value, and c) dividend payment is not relevant to
company‟s value.
Thomsen (2004) states that there are influences of dividend on company‟s value. Direct influence of
payout ratio on company‟s value can be negative. However, payout ratio is a signal that the company is very
successful or that company managers are very committed to maximizing shareholder value, which can improve
company‟s value then.
Asquith and Mullins (1983) explains that negative influence may result in wealth from other costs
related to dividend payment. Other than administrative costs for dividend, companies may also have to pay for
transactional costs related to new equity issuance. With investment policy given and capital structure, increases
in dividend must be funded by new equity. On the other hand, positive influence on wealth has also been
suggested by researchers. Investors traditionally would prefer dividend in cash. Positive influence on wealth
may also be resulted from dividend policy that communicates valuable information to investors. Dividend can
be a medium to communicate quality managerial information about their interpretation of newest company‟s
performance and their evaluation of future performance. This opinion is consistent with the findings of Lintner
(1956), Gordon (1959), Ross (1977) and Bhattacharya (1979).
Factors Influencing Dividend Policy
Previous findings have used different factors in analyzing the effect of company dividend. Lintner
(1956) states the factor that influences dividend payment is company‟s income rate, in which high dividend
payout ratio occurs in companies with stable income while low dividend payout ratio occurs in emerging
companies.
Al-Malkawi (2007) finds that financial leverage of a company significantly has negative relation with
dividend policy. The factors used in his research are: Signaling, investment of opportunities, size, financial
leverage, profitability, and taxes. Amidu (2007) uses factors that affect dividend policy and company
performance as follows: return on equity, return on assets, dividend payout, size, leverage, and growth.
Azhagaiah et al., (2008) uses factors like dividend per share, retained earnings, price earnings ratio, and market
value of share that affect dividend policy and wealth of shareholders.
Nazir et al., (2010) indicates factors like price volatility, dividend yield, payout ratio, leverage, asset
growth, and earning volatility affecting stock price changes in Karachi Stock Exchange.
Hussainey et al., (2010) tests dividend policy and stock price change in a research using factors such as price
volatility, dividend yield, payout ratio, size/market value, earning volatility, long term debt and growth in assets.
The result shows positive correlation between dividend yield and stock price change, as well as negative
correlation between payout ratio and stock price changes.
Okafor (2011) uses factors such as dividend yield, dividend payout ratio, asset growth, earning volatility, and
size. The result shows that dividend policy is a form of good information for investors which consequently make
stock price variable.
Khan et al., (2011) uses factors such as stock price, cash dividend, stock dividend, retention ratio,
dividend yield, earning after tax, earning per share, and return on equity. The result shows that dividend yield
negatively correlates to stock price in both fixed and disorder effects and significantly explains variations of
stock price. This makes it clearer that investors want dividend because it gives future prospect signal of
companies.
Al Shubiri (2011) states that company liquidity is a critical factor that influences cash dividend
payment. Companies with high cash liquidity will pay higher dividend than those with lower cash liquidity. The
factors used in the research are leverage, institutional ownership, profitability, business risk, assets structure,
liquidity, growth opportunities, firm size, and free cash flow.
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3. The Effects of Internal Factors and Stock…
Dividend irrelevant theory by Modigliani and Miller (1981) has been proposed, showing that dividend
policy does not influence company‟s value. It is investment policy or company‟s profits, not dividend policy,
that influences company‟s value.
Different findings of Gordon and Lintner (1963) suggests that investors can view dividend more
definite than capital gain. Investors usually avoid risks, thus they would prefer currently stable return, i.e
dividend. Dividend represents progress of the company that is useful for shareholders and investors, and it
ultimately results in rises of stock price.
Tax preference theory by Brennan (1970) states that low dividend payout ratio can lower return rate
and consequently will improve company‟s value because dividend is paid from income after tax. Investors are
faced with dividend with higher tax than capital gain and it makes investors prefer company to retain their
earnings and re-invest it in the business so profits will improve and stock price will rise.
Stock Ownership Structure
Stock ownership structure is company‟s stock ownership distributed among investors. Investors can
include individual, family, institutional and insider/managerial ownership.
According to Warrad et al., (2012) company‟s stock ownership is divided into private ownership, government
ownership, family ownership, and foreign ownership.
According to Ullah (2012), concentrated institutional ownership plays an important role in company
policies, particularly about dividend payment policy. Shahab-U-Din (2011) says that decision making, such as
dividend policy and leverage, will improve company‟s value as long as the policy can go well with every stakes.
According to Shleifer and Visny in Kouki and Guizani (2009), a manager must be monitored and this
monitoring must be done by large shareholders (blockholders) so the cost for monitoring agencies can be
reduced. These shareholders have incentive to bear the cost of monitoring due to the profit they get from
investment.
Mehrani (2011) says that ownership structure is a factor that influences company policies like dividend
policy, and it creates a relationship between ownership structure and expected dividend policy. Dividend policy
is one of key components of company policies and has been viewed as an interesting issue in literature.
Dividend payout decision influences company‟s value. In addition, cash dividend has special position among
shareholders.
Wahla (2012) suggests that the correlation between ownership structure and company‟s performance
has become an important area on corporate management studies over the last two decades. Many studies suggest
that market value of a company is not only based on investment projects, but also on other factors like financial
structure, dividend policy, control management, and ownership structure and they can also improve company‟s
value.
Thomson (2004) says that blockholders ownership can either improve company‟s value because of
incentive harmony or degrade it because of a takeover of minority investor shares. Dividend policy provides
ways to differentiate the two effects: while blockholders may prefer low dividend when they get the benefit of
company control, minority shareholders may prefer high dividend that is rewarding for all of shareholders. The
role of blockholders in company is very critical. Theoretically speaking, blockholders can play an important role
in eliminating agency problems between shareholders and managers.
Company’s Value
The company‟s long-term goal is to improve its company‟s value. Improving company‟s value means
maximizing the wealth of shareholders. According to Fama and French (2001), optimum company;s value can
be reached through the implementation of financial management functions, making one financial decision will
affect other financial decisions and therefore will influence company‟s value. Mai (2010) states that managing
corporate finance involves settling investment decision, financing and dividend policy, and an optimum
combination of these three decisions will maximize company‟s value. Wahyudi (2006) suggests that dividend
policy directly influences company‟s value and investment decision influences company‟s value indirectly
through dividend policy and financing decision.
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4. The Effects of Internal Factors and Stock…
Lintner (1956) and Gordon (1959), Lintner (1962) and Gordon (1963) propose that dividend payout
ratio can improve company‟s value because investors think they would rather receive dividend that is more
definite than capital gain. So the higher the dividend, the higher the company‟s value as reflected from the rises
of stock price. Supporting finding by Bhattacharya (1979) states that investors would prefer high dividend
because it has lower risks and uncertainties than retained earnings that will be re-invested in the business.
In his research by interviewing managers from 28 companies, Lintner (1956) concludes that company‟s value
depends on dividend policy and furthermore, companies prefer stable dividend policy. Meanwhile, Gordon
(1963) finds that dividend policy significantly has positive impact on company‟s value. Asquith and Mullins
(1983) state that positive influence on wealth may also be resulted from dividend policy that communicates
valuable information to investors. Dividend can be a medium to communicate quality managerial information
and rationale of future performance.
Miller and Modigliani (1961) suggest that the concept of dividend is not relevant. The results show that
dividend policy does not influence company‟s value; it is investment policy or company‟s earning asset ability,
not dividend policy that influences company‟s value.
Increases in company‟s debt will increase the failure risk for paying off the principal and interests.
Interest is an expense that must constantly be paid regardless of company‟s size. According to Utami and Inanga
(2011), the consequence related to the existence of debt (leverage) will make the company tend to be the target
of additional external supervision by the debt provider to protect their investments. Therefore, the increasing use
of leverage must reduce the agency cost level which is inherent in the operation structure. Consequently, the
existence of debt policy will have negative impacts to the company. Yanming ( 2007 ) states that manager will
avoid the debts to minimize external monitoring.
Mehrani (2011) describes that structure of share ownership in a company is an influential factor for the
company's policies, of which one of them is dividend policy, so there is a relationship between share ownership
structure and dividend policy. According to Shahab-U-Din (2011), the decision of dividend and leverage policy
will increase the company‟s value as long as the policy is appropriate with interests of many parties.
The Research Hypothesis
1. The Relationship between Internal Factors and Dividend Policies
a)
The Influence of Free Cash Flow towards Dividend Policy
Free Cash Flow is an operation profit that is minus tax and investments in the working capital and fixed
assets needed by the company to maintain its business. According to Jensen (1986) and Amidu (2007), Free
Cash Flow is the remaining cash flow after all projects with positive Net Present Value (NPV) is started, so
Free Cash Flow reflects the cash that is actually available to be distributed to the investors. Therefore it
becomes the manager strategy to improve the company‟s value, in line with the research by Isti Fadah
(2007), Pujiastuti (2008), Utami and lnanga (2011), Al-Shubiri (2011), Mehta (2012). So the proposed
hypothesis is:
Hypothesis a.: Free Cash Flow influences dividend policy.
b) The Influence of Company‟s Size towards Dividend Policy
Large companies usually have a better access to capital market and have facilities in raising funds with
lower cost and have fewer constraints compared to smaller companies. The size of companies can be
observed from their total asset. The bigger the company, the wider its possibility to give and to show
maturity so that can reduce uncertainty about the company‟s prospects which is able to produce profits. It
shows its least dependence upon internal funding sources. Therefore, large companies tend to pay higher
dividends to shareholders. This is consistent with the research by Gordon (1962), Fama and French (2001),
Al-Malkawi (2007), Kowalski et al., (2007), and Mehta (2012). Based on the explanation above, the
proposed hypothesis is:
Hypothesis b.: Company‟s size affects the dividend policy.
c)
The Influence of Company‟s Debt towards the Dividend Policy.
When a company receives a loan to finance its investments, it has committed to pay a fixed cost in the form
of interest and principal. A failure to meet these obligations may make the company liquidated. So, this loan
has a payment failure risk. Rozelf (1982) shows that companies with a high leverage have low dividend
payment ratio. Asif (2011) and Al-Malkawi (2007) state that Leverage is negatively related to dividend
policy, because the company needs to maintain its internal cash flow to pay the obligation rather than
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5. The Effects of Internal Factors and Stock…
distribute cash to shareholders. The increase of debt would increase the risk of inability to pay the
obligations which is the loan principal and interest. So, the proposed hypothesis is:
Hypothesis. c.: The company‟s debt influences on the dividend policy.
d) The Influence of Asset Growth towards Dividend Policy.
Companies with a high growth and investment opportunities need internal source of funds to finance its
investment so they tend to retain profits and pay small dividends or even do not pay them. This is consistent
with the research by Al-Malkawi (2007). Thus the hypothesis proposed is :
Hypothesis
The growth of asset‟s company influences the policy dividends.
e)
The Influence of Return on Equity (ROE) towards dividend policy
Decision to pay dividend that is determined by General Meeting of Shareholders (RUPS) starts from the
profits obtained by the company, so its profitability level is the most important variable that can affect
company‟s dividend decision. According to Lintner (1956) and Fama and French (2000), the level of
Company‟s Profitability is the important determination of dividend payments. In this research, profitability
which is proxied with Return on Equity (ROE) is the ratio of net profit of common stock equity. So this
ratio measures the rate of return over the investment ordinary shareholders. De Angelo et al (2005) propose
that there is a very significant relationship between dividend payment policy and ROE. So the hypothesis
proposed is:
Hypothesis 1. e.: Return on equity has an influence on the dividend policy.
f)
The Influence of Financial Risk towards Dividend Policy
Financial risk is the increase of failure payment risk that is resulted from the increase of company‟s debt.
This risk becomes ordinary shareholders burden, and thus financial risk has negative impact on dividend
policy; this is in line with the research conducted by Al-Subiri (2011) and Mehta (2012). Therefore, the
hypothesis proposed is :
Hypothesis
g) Financial risk influences dividend policy.
2. The Relationship between Share Ownerships and Dividend Policies
a) The Influence of Managerial Ownership towards Dividend Policy
Managerial ownership is the share ownership by commissioners, directors and the company's managers.
The existence of Asymmetric information between managers and shareholders will lead to a conflict that
will increase agent costs, but agent costs can be minimized by increasing manager‟s share ownership
(Managerial Ownership). According to Yanming (2007), the positive relationship between managerial
ownership and Company's value is the medium to effectively reduce agent costs. So, the existence of that
positive relationship means the existence of managerial ownership can increase company's value.
Jensen and Meckling (1976) state that managerial ownership functions to harmonize manager‟s and
shareholder‟s interests, so it is expected that there is a positive relationship between managerial ownership
and company's value. The increase of managerial ownership can minimize agent cost especially it can
reduce supervision costs.
Al-Malkawi (2007) says that a higher proportion of managerial ownershp in company will reduce the need
of using dividend as a device to reduce agent costs. Therefore, the hypothesis proposed is :
Hypothesis 2.a. : Managerial ownership influences dividend policy
b) The Influence of Institutional Ownership towards Dividend Policy
Institutional ownership is the share ownership by institutions (company) which is large investors that have
a greater control than the one owned by insurance companies, banks, mutual funds and other financial
institutions. So the higher the level of that institutional ownership, the stronger the external control over the
companies, so it can reduce agent cost, and the company will determine low dividend.
=Ullah (2012) states that ownership is concentrated to play a very important role in company‟s policies,
especially those related to dividend policies. Concentrated ownership refers to the structure in which large
shareholders own a large amount of company‟s shares. Recently, the major ownership or the concentrated
ownership or is replaced by concentrated institutional ownership such as banks, insurances, etc because
these institutions are the major shareholders. La Porta et al, (1998) states that effective controlling
shareholders can influence company‟s policy. As a result, it can implement policy which is beneficial for
them rather than for minor shareholders. In his research, Ramli (2010) says that companies with more
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6. The Effects of Internal Factors and Stock…
concentrated ownership will pay higher dividends because the controlling shareholders have bigger
influence towards the dividend policy. Thus the hypothesis proposed is:
Hypothesis 2.b : Institutional ownership‟s structure have an influence towards dividend policy.
3. The Relationship between Internal Factors and Company’s Value
a) The Influence of Free Cash Flow on The Company‟s Value
Laporta et al., (1998) states that if a company has free cash flow, the manager will apply uneconomical
practices. While according to Utami and Inanga (2011), a company with free cash flow tends to face
conflicts between shareholders and managers. Jensen (1986) says that higher dividend payments are
expected to be more effective in minimizing agency costs, because company manager is agent of
shareholders. This condition makes the manager have control over the use of free cash flow that must be
invested back. According to Jensen (1986) free cash flow is defined as the cash flow from excess funds
required for all projects with positive Net Present Value (NPV). Then, the increase of free cash flow can
make the company's performance decrease and eventually infuence the company‟s value. So, the hypothesis
proposed is :
Hypothesis 3. a.: Free Cash Flow has an influence towards the company's value.
b) The Influence of Company‟s Size towards Its Value
Company‟s size is the amount of assets owned by the company. The bigger the company, the easier the way
to get funds to support investments, because there is an easiness to access Capital Market. The result of the
study conducted by Sudarma (2004) indicates that the variable of company‟s size has positive effect on
company‟s value. Sofyaningsih and Hardiningsih (2011) say that the bigger the size of company, the higher
the company‟s belief about its ability to return investment. Large companies are more likely to be matured
and more trusted by investors. Therefore, the hypothesis proposed is:
Hypothesis 3. b.: The company‟s size has an influence towards the company's value.
c)
The Influence of Debt towards the Company„s Value
According to the theory Asymmetric information proposed by Miller and Rock (1985), the company
manager knows more about company's correct revenue than external investors. Related to the theory
Asymmetric information according to Ross (1977), considered that debt is positive signals for the
company‟s future. Meanwhile, Yanming (2007) supports the view that leverage has a positive effect on the
company's value. Jensen and Meckling (1976) state that the use of debt will reduce the external equity and
increase the proportion of managerial ownership. However, according to Utami and Inanga (2011), the use
of debt makes the company tend to be the object of supervision by the debt providers. So the debt can
function as a mechanism to discipline the company‟s manager and prevent them to maximize their personal
gain. Yet, the use of debt causes a high-risk over the return of interest payment because of the uncertainty in
returning assets. So, to avoid the bankruptcy, the use of debt should be reduced. Therefore, the hypothesis
proposed is:
Hypothesis 3. c.: The debt has an influence on the company's value.
d) The Influence of Asset Growth on the Company‟s Value
Utami and Inanga (2011) propose that a company with growth tends to use internal funds to finance the
investment project; if it has a great growth, it tends to pay smaller dividend, so the dependence on external
funding can be reduced. Aisjah (2009) states that a growing companies will maximally be able to manage
the assets so that they get greater profits and have wider opportunities to select the future investment.
Meanwhile, according to Fitman and Wessels (1988) in Shahab-U-Din (2011), the high growth rate
indicates the bigger flexibility in investment in the future and offers greater opportunities to take over the
wealth from the debtor so that at the end it will increase the value of the company as stated in the research
results of Sudarma (2004) that the variable of company asset growth gives positive influence to company
values. Thus, the hypothesis proposed is:
Hypothesis 3. d.: Asset growth gives positive influence to company value.
e)
The Influence of Return on Equity (ROE) towards Company‟s Value
Return on Equity (ROE) is the ratio of net profit to the equity of common stocks. The high ROE obtained
by the company indicates high profitability level. Thomsen (2004) states that higher profitability means
better investment opportunity and the needs to maintain income. According to Khan (2011) ROE is
calculated by dividing the net profit by share holder‟s equity. This is also expected to give positive impact
to stock price or company‟s value.
Hypothesis 3. e.: Return on Equity (ROE) influences company‟s value.
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7. The Effects of Internal Factors and Stock…
f)
The Influence of Financial Risk towards Company‟s Value
Company‟s risk is a risk resulted from the accumulation of company‟s debt which will make the company
fail to pay them off. This risk becomes the burden of share holders. According to Sudarma (2004) financial
risk is profit variable which a company must bear and financial leverage is one of the factors which
influence financial risk. The higher use of financial leverage will result is high fixed capital expenditures
and high financial risk as well. Thus the hypothesis proposed is:
Hypothesis 3. f.: Financial risk influences company‟s value.
4. The Influence of Share Ownership towards Company’s Value
a) The Influence of Management on Company‟s Value
Due to the ownership separation between the ownership of share holders and that of management, agency
problems between share holders and management will occur (Jensen and Meclin, 1976). Therefore, to
avoid the problem of share ownership agency by management, share ownership can be increased, which
according to Yamming (2007), the increase of the percentage of management share ownership will make
the conflicts between and shareholders decrease because management tends to make decision which
maximize the wealth of share holders which eventually will increase company‟s value. According to Jensen
and Mecling (1976) the management ownership can function to balance between the interest of the
management and that of external share holders. Thus, management ownership can be used as incentive
facility to effectively reduce agency problems as revealed in the research results of Shahab-U-Din (2011)
indicating that great increase in management ownership will increase company‟s value. Thus, the
hypothesis proposed is:
Hypothesis 4. a.: Management ownership influences company‟s value.
b) The Influence of Institutional Ownership towards Company‟s Value
Institutional ownership is the percentage of equity owned by institutional investors. The existence of big
institutional investors allows more abilities in giving supervision to company management than the spread
individual ownership. Ullah (2012) states that nowadays ownership is concentrated to big share holders or
Block Holders is substituted by concentrated institutional ownership such as Banks, Insurance or other
institutions. Kouki and Guizani (2009) state that the role of institutional monitory (Block Holders) is very
important – if management is not monitored by Block holders, they can transfer the resources for their
interest rather than for the company‟s interest, and eventually they are able to influence the operation of the
company in achieving company‟s objectives, i.e. to increase company‟s value (Wahyudi and Pawestri,
2006). The higher the institutional ownership, the stronger the external control towards the company and
this will reduce agent cost and so the company tends to use low dividend. According to La Porta et.al
(1998) the observation results show that the holders of monitory stocks have effective influence towards
company‟s decision, which eventually can increase company‟s value. Thus the hypothesis proposed is:
Hypothesis 4. b.: Institutional ownership influences company‟s value.
5. The Influence of Dividend Policy towards Company’s Value
Dividend policy is the decision of the company based on General Meeting of Stock Holders (GMSH),
whether the profit obtained will be distributed to the share holders as dividend or will be the profit retained as
investment. Sometimes some parts of the profit are distributed while some are retained as investment.
Lintner (1956) conveys that dividend policy influences company‟s value and so a company prefers to
have stable dividend. Miller and Modigliani (1961) who famous for their dividend irrelevant theory say that
their research results do not prove the influence of dividend policy on company‟s value, the dividend payment is
not relevant with company‟s value, or the stock price depends on the profit produced by the assets or investment
rather than the profit distributed to the stock holders.
Gordon and Litner (1963) state that investor dividend is more certain than Capital Gain. Dividend can
give signals about the future progress of the company. According to Thomson (2004) high dividend is a kind of
signal that the company makes progress or that the management is very committed to maximize the value of the
stock holders, so that the dividend policy can increase company value. The researchers having the same idea are
Bhattacharya (1976), Sudarma (2004), Aisyah (2009) Sofyaningsih (2011). Thus the hypothesis proposed is:
Hypothesis 5: Dividend influences company‟s value.
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8. The Effects of Internal Factors and Stock…
III.
RESEARCH METHODS
The Approach of the research is quantitative (positivist)
The location of the research is Indonesian Stock Exchange (ISE) in Jakarta.
Population and Sample
The population of the study is all the manufactured companies listed in Indonesia Stock Exchange
(ISE) having fulfilled the criteria with observation periods from 2005 to 2010. Therefore the data of 2005 are
used as the start of the observation periods and the data of 2010 are used as the end of observation periods, in
which n= 164 companies.
The number of the population fulfilling the criteria is 55 companies. The kind of data obtained consists
of secondary data, in which the data panel, n= 55x6= 330
Analysis of Inferential statistics is used in this research to examine the influence among the variables using
Smart PLS (Partial Least Square) version 2.
IV.
ANALYSIS AND DISCUSSION
To find out the results of the hypothesis testing, Partial Least Square is used as explained in the
following table. If t value obtained is from the table is higher than the t value in the table 1.96 at 5%, the
hypotheses among the variables are accepted. On the other hand, if the t value is smaller than 1.96 the
hypotheses are rejected.
Table 1
The Results of Hypothesis Testing
Hypothesis The Relationships among the variables
Parameter
Coefficient
1.a
Free Cash Flow  Dividend Policy
0.015
1.b
Firm Size  Dividend Policy
0.026
1.c
Debt  Dividend Policy
-0.069
1.d
Growth  Dividend Policy
0.108
1.e
ROE  Dividend Policy
0.048
1.f
Financial Risk  Dividend Policy
-0.024
2.a
Management Ownership Dividend Policy
0.009
2.b
Institutional Policy  Dividend Policy
0.105
3.a
Free Cash Flow Company‟s Value
0.085
3.b
Firm Size  Company‟s Value
-0.245
3.c
Debt Company‟s Value
-0.410
3.d
Growth  Company‟s Value
-0.060
3.e
ROE  Company‟s Value
-0.007
3.f
Financial Risk Company‟s Value
-0.026
4.a
Management Ownership  Company‟s Value
0.042
4.b
Institutional Ownership  Company‟s Value
-0.141
5
Dividend Policy  Company‟s Value
0.026
Source: Treated Data
T value
Notes
0.894
1.172
4.166
5.5066
3.520
4.201
0.945
10.452
6.330
20.341
18.683
5-341
0.739
8.653
3.437
6.851
3.022
Not Significant
Not Significant
Significant**
Significant**
Significant**
Significant**
Not Significant
Significant **
Significant **
Significant**
Significant**
Significant**
Not Significant
Significant**
Significant**
Significant**
Significant**
The result of the output on table 1 can be used to answer the hypotheses in this study.
The Influence of Free Cash Flow towards Dividend Policy
The parameter coefficient of path obtained from the influence of Free Cash Flow variables towards the
dividend policy is 0.015 with t statistic value of 0.894< 1.96 at the significant level of α = 0.05 (5%) indicating that
there is a significant influence of Free Cash Flow variable towards dividend policy. The results of the analysis
does not support the hypothesis of 1.a (H 1a) in which there is no influence of Free Cash Flow towards dividend
policy. The result of this coefficient parameter is not significant for manufactured companies in Indonesia.
The Influence of Company Size towards Dividend Policy
The path parameter coefficient obtained from he influence of firm size variable towards the dividend
policy is 0.026 with t statistic value of 1.172< 1.645 at a significant level α = 0.05% (5%) stating that there is no
significant influence between the firm size variable towards dividend policy. This analysis result did not support
the research hypothesis 1.b (H 1b), in which there is no influence of firm size towards dividend policy. The result
of the analysis of this parameter coefficient is not significant.
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9. The Effects of Internal Factors and Stock…
The influence of Firm Debt towards Dividend Policy
The path parameter coefficient obtained from the influence of firm debt is –o.o69 with t statistic value of
4.166>1.96 at the significant level of α =0.005(5%) indicating that there is a significant negative influence of
firm debt and dividend policy. The result of this analysis supported the research hypothesis 1.c (H 1c), in which
there is influence of firm debt towards dividend policy. The value of -0.069 at the parameter coefficient means
that the higher the firm debt, the lower the dividend policy and vice versa.
The Influence of Company’s Growth towards Dividend Policy
The path parameter coefficient obtained from the influence of firm growth variable towards dividend
policy is 0.108 with t statistic value of 5.066 > 1.96 at the significant level of α =0.05 (5%) indicating that there is
a positive and significant influence of firm growth variable towards dividend policy. The result of this analysis
supported the research hypothesis 1.d, in which there is influence of firm growth towards dividend policy. The
value of 0.108 at the parameter coefficient means that the higher the firm growth the better the dividend policy
and vice versa.
The Influence of Return on Equity towards Dividend Policy
The path parameter Coefficient obtained from the influence of ROE variable towards dividend policy is
0.048 with t statistic value of 3.520> 1.96 at the significant level of α =0.05 (5%) indicating that there is a positive
influence of ROE variable towards dividend policy. The results of this analysis supported the research
hypothesis 1.e, in which there is an influence of ROE towards dividend policies. The value of 0.048 in
parameter coefficient means the higher the company‟s ROE (Return on Equity), the better the dividend policies
and vice versa.
The Influence of Financial Risks towards Dividend Policies
The path parameter coefficient obtained from the influence of financial risks variable towards dividend
policies is -0.024 with t statistic value of 4.201>1.96 at significance level of α =0.05 (5%) explaining that there are
negative and significant influences of financial risks variable towards dividend policies. The results of this
analysis support the research hypothesis 1.f since the financial risks influence the dividend policies. The value
of -0.024 in the parameter coefficient means: the higher the company‟s financial risks, the lower the dividend
policies and vice versa.
The Influence of Managerial Ownership towards Dividend Policies
The path parameter coefficient obtained from the influence of managerial ownership variable towards
dividend policies is 0.009 with t statistic value of 0.945>1.96 at significance level of α =0.05 (5%) explaining that
there are no significant influences of managerial ownership towards dividend policies. Even at the testing phase
at significant level of 10%, there are still no significant influences, where the t statistic value is lower than the t table
value (0.945<1.645). The results of this analysis do not support the research hypothesis 2.a since the managerial
ownership influences the dividend policies. The value of 0.009 in the parameter coefficient means: the higher
the managerial ownership, the higher the dividend policies and vice versa. Yet, this parameter coefficient
analysis does not significant.
The Influence of Institutional Ownership towards Dividend Policies
The path parameter coefficient obtained from the influence of institutional ownership variable towards
dividend policies is 0.105 with t statistic value of 10.452>1.96 at significance level of α =0.05 (5%) explaining that
there are positive and significant influences of institutional ownership variable towards dividend policies. The
results of this analysis support the research hypothesis 2.b since the institutional ownership influences the
dividend policies. The value of 0.105 in the parameter coefficient means: the higher the institutional ownership,
the higher the dividend policies and vice versa.
The Influence of Free Cash Flow towards Company’s Value
The path parameter coefficient obtained from the influence of free cash flow variable towards
company‟s value is 0.085 with t statistic value of 6.330>1.96 at significance level of α =0.05 (5%) explaining that
there are positive and significant influences of free cash flow variable towards company‟s value. The results of
this analysis support the research hypothesis 3.a since the free cash flow influences the company‟s value. The
value of 0.085 in the parameter coefficient means the higher the free cash flow available in the company, the
higher the company‟s value and vice versa.
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10. The Effects of Internal Factors and Stock…
The Influence of Company’s Size towards Company’s Value
The path parameter coefficient obtained from the influence of company‟s size variable towards
company‟s value is -0.245 with t statistic value of 20.341>1.96 at significance level of α =0.05 (5%) explaining
that there are negative and significant influences of company‟s size variable towards company‟s value. The
results of this analysis support the research hypothesis 3.b since the company‟s size influences the company‟s
value. The value of -0.245 in the parameter coefficient means the higher the company‟s size, the lower the
company‟s value and vice versa.
The Influence of Company’s Debt towards Company’s Value
The path parameter coefficient obtained from the influence of company‟s debt variable towards
company‟s value is -0.410 with t statistic value of 18.683>1.96 at significance level of α =0.05 (5%) explaining
that there are negative and significant influences of company‟s debt variable towards company‟s value. The
results of this analysis support the research hypothesis 3.c since the company‟s debt influences the company‟s
value. The value of -0.410 in the parameter coefficient means the higher the company‟s debt, the lower the
company‟s value and vice versa.
The Influence of Company’s Growth towards Company’s Value
The path parameter coefficient obtained from the influence of asset‟s growth variable towards
company‟s value is -0.060 with t statistic value of 5.341>1.96 at significance level of α =0.05 (5%) explaining that
there are negative and significant influences of company‟s growth variable towards company‟s value. The
results of this analysis support the research hypothesis 3.d since the company‟s asset growth influences the
company‟s value. The value of -0.060 in the parameter coefficient means the higher the company‟s growth, the
lower the company‟s value and vice versa.
The Influence of Return on Equity towards Company’s Value
The path parameter coefficient obtained from the influence of return on equity variable towards
company‟s value is -0.007 with t statistic value of 0.739>1.96 at significance level of α =0.05 (5%) explaining that
there are no significant influence between return on equity variable towards company‟s value. Even when it is
tested at significant level of 10%, there are still no significant influences, where the t statistic value is lower than
the t table value(0.739<1.645). The results of this analysis do not support the research hypothesis 3.e since the
return on equity does not influence the company‟s value. The value of -0.007 in the parameter coefficient means
the higher the company‟s return on equity, the lower the company‟s value and vice versa. This negative
parameter coefficient analysis result is not significant. It can be concluded that Indonesian Manufactured
Company‟s ROE has a positive relationship since the higher the company‟s return on equity, the higher the
company‟s value.
The Influence of Financial Risks towards Company’s Value
The path parameter coefficient obtained from the influence of financial risks variable towards
company‟s value is -0.026 with t statistic value of 8.653>1.96 at significance level of α =0.05 (5%) explaining that
there are negative and significant influences of financial risks variable towards company‟s value. The results of
this analysis support the research hypothesis 3.f since the financial risks influence the company‟s value. The
value of -0.026 in the parameter coefficient means: the higher the financial risks, the lower the company‟s value
and vice versa.
The Influence of Managerial Ownership towards Company’s Value
The path parameter coefficient obtained from the influence of managerial ownership variable towards
company‟s value is 0.042 with t statistic value of 3.437>1.96 at significance level of α =0.05 (5%) explaining that
there are positive and significant influences of managerial ownership variable towards company‟s value. The
results of this analysis support the research hypothesis 4.a since the managerial ownership influences the
company‟s value. The value of 0.042 in the parameter coefficient means the higher the managerial ownership,
the higher the company‟s value and vice versa.
The Influence of Institutional Ownership towards Company’s Value
The path parameter coefficient obtained from the influence of institutional ownership variable towards
company‟s value is -0.141 with t statistic value of 6.851>1.96 at significance level of α =0.05 (5%) explaining that
there are negative and significant influences of institutional ownership variable towards company‟s value. The
results of this analysis support the research hypothesis 4.b since the institutional ownership influences the
company‟s value. The value of -0.141 in parameter coefficient means the higher the institutional ownership, the
lower the company‟s value and vice versa.
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11. The Effects of Internal Factors and Stock…
The Influence of Dividend Policies towards Company’s Value
The path parameter coefficient obtained from the influence of dividend policies variable towards
company‟s value is 0.026 with t statistic value of 3.022>1.96 at significance level of α =0.05 (5%) explaining that
there are positive and significant influences of dividend policies variable towards company‟s value. The results
of this analysis support the research hypothesis 5 (H 5) since the dividend policies influence the company‟s
value. The value of 0.026 in parameter coefficient means the higher the dividend policies, the higher the
company‟s value and vice versa.
V. CONCLUSIONS
1) Partially, each of the results of analysis on the internal factors indicates that the free cash flow variable and
company‟s size do not influence the dividend policies, and asset growth has positive and significant
influences towards dividend policies. This shows that asset growth can increase the company‟s dividend
policies. Debt variable has negative and significant influences towards dividend policies. It means that the
bigger the debt, the lower the dividend policies. Return of Equity has significant and positive influence
towards dividend policies. This shows that dividend policies in manufactured company do consider
profitability as the prominent consideration as well as the future company‟s prospect. Financial risk variable
has significant and negative influence towards dividend policies. This shows that dividend policies do
consider the financial risks as payment value risks as the effect of the increase of company‟s debt.
2) Partially, the results of the testing on stakeholder ownership structure show that managerial ownership does
not influence the dividend policies. Institution ownership variable has a positive influence towards dividend
policies. This shows that the improvement on institution ownership tends to improve dividend policies
improvement. These findings empirically show that the stakeholder ownership structure is the determinant
variable of dividend policies.
3) Partially, each of the analysis results on internal factors shows that: the free cash flow variable has a
significant and positive influence towards the company‟s value. This finding shows that enough free cash
flow indicates that the company is able to pay the dividend. This can affect the company‟s value.
Company‟s size, debt, financial risks, and financial growth variables have significant and negative
influences towards the company‟s value. These findings show that the bigger the company‟s size, debt,
financial risks and financial growth, the lower the company‟s value and on the other hand, the smaller the
company‟s size, debt, financial risks and financial growth, the higher the company‟s value. Return on
equity variable does not influence the company‟s value. This finding shows that profitability is not a
determinant variable of the company‟s value.
4) Partially, the results of stakeholder ownership structure show that managerial ownership has significant and
positive influences towards company‟s value. This finding means that the higher the managerial ownership,
the higher the company‟s value. Institutional ownership has significant and negative influence towards
company‟s value. This shows that the higher the institutional ownership, the lower the company‟s value and
on the other hand, the lower the institutional ownership, the higher the company‟s value.
5) Dividend policies have significant and positive influences towards company‟s value. The finding shows that
the higher the dividend, the higher company‟s value and on the other hand, the lower the dividend, the
lower the company‟s value. This research finding shows that dividend payment is positively responded by
public investors. This means that in buying manufactured sector company stock in Indonesian Stock
Exchange (ISE), the public investors consider the dividend payment. The investors in manufactured sectors
see the dividend payment as the important thing in the improvement of company‟s value.
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